Private company accounting alternatives on goodwill (Observations from the front lines)

At a glance

Recently the FASB issued an Accounting Standards Update to permit private companies to amortize goodwill acquired in a business combination, and to apply a simplified goodwill impairment model. This change is intended to help reduce reporting complexity for private companies; however, private companies should carefully consider this alternative, especially for those considering an initial public offering.

Observations from the front lines provides PwC's insight on current economic issues, our perspective regarding the business impacts, and actions we have seen companies taking to effectively address those issues.

Private company accounting alternatives on goodwill

Companies must consider these benefits in the context of their long term strategic objectives and the new definition of a public company per the FASB. A private company that elects the goodwill alternative may incur additional costs and complexity in later periods if it later meets the definition of a public company (e.g., files a Form S-1). Also, companies should ensure that key financial statement users, such as lenders, will accept the alternative, and should consider any economic consequences, such as the impact on debt covenant compliance, that will arise from increased amortization expense.

Highlights in this issue:

Private companies can elect to amortize goodwill on a straight-line basis over 10 years

A one-step impairment test is performed only if a triggering event occurs and if a quantitative impairment test is needed

The goodwill alternative is a policy election that will apply to all existing and future goodwill

Private companies should understand the implications of the alternative and assess the likelihood that the company will go public